Investing » Beginner Guides » Full-Service Vs Online Brokers: Which Is Better For You?
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Full-Service Vs Online Brokers: Which Is Better For You?

The first decision to make when you’re selecting a broker for your investments is choosing between a full-service broker or a discount broker.

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Full-Service Vs Online Brokers: Which Is Better For You

The term “full service” may sound so promising but it’s not necessarily what everybody needs.

In the end,it all boils down to what the type of investments you plan to make.

Here’s our guide to the various types of brokerages, their services and how much you might have to pay for them.

What Is a Brokerage Account?

You can liken a brokerage account to a savings account – but this time, you put money into the account so you can use it exclusively for investing in just about any type of instrument available in the market. You can use a brokerage account to purchase stocks, bonds, mutual funds, exchange-traded funds, index funds, options, futures, foreign currencies, commodities, real estate investment trusts, etc. You name it and the brokerage account can probably handle it.

Just like a savings account, the brokerage account provides you with liquidity. You can take out money anytime (although this might mean selling some investments and/or having to pay capital gains taxes). You can also set up an automatic transfer facility and in some institutions, link it with your checking account.

Once you have your personal brokerage account, you will be able to buy and sell investments using that account. Depending on the firm you select for your account, you will have a certain level of flexibility with your transactions. Even if the financial institution carries the account, you, the investor will be the owner of the account’s assets.

Brokerage Account Types

You can open any of several types of brokerage accounts. But you need to choose one that fits your investing goals, the kind of investments you plan to purchase and how much involvement you’d like the brokerage to have when it comes to selecting and managing your investments.

1. Full-service broker

If you an investor who wants a close personal connection with a financial advisor at your brokerage company, you might be better opting for a full-service broker.

They usually allow you to talk with in-house experts to help you identify and pick investments, do wide-scope financial planning, manage the tax impacts of your investing, or just get an acid test when the market becomes rougher than usual.

However, the downside of this type of broker is the cost. They charge expensive fees along the way and some of them even charge robust commissions while others collect a small percentage of your assets at regular schedules.

2. Discount/Online Brokers

Online discount brokerage accounts would be the equivalent of self-service shops for investors. Their main appeal to investors is their generally extremely low fees although when it comes to choosing your investments, they usually leave you to yourself.

You may find some discount brokers that offer access to advisors or investment research but don’t expect too much. They probably won’t give you the same level of access that the full-service brokers provide because, let’s face it, you’re only paying peanuts.

3. Robo-advisors

You could say that the full-service brokers and the online discount brokers occupy the two extreme ends of the brokerage spectrum and the Robo-advisors would sit in the middle. A Robo-advisor is an online financial advisor that will help you build an automated portfolio of investments, but everything is through their online interface. It will not grant you access to any human advisor.

Similar to a full-service broker, a Robo-advisor will choose investments and perform trades on behalf of their customers. The disadvantage is, it relies only on a computer program and there is no human intervention that can fully customize each portfolio to fit each individual customer.

Full-service Broker Vs Discount/Online Brokers

Management

The other benefits of “full-service” brokers are that they do more than just facilitate the buying and selling of instruments for their customers. They also offer a wide range of products and services that may include financial, retirement and estate planning, investing and tax advice and regular investment updates.

If you have a trained, skilled, and experienced full-service broker in your team who is looking out for your best interest, you can save a bunch of time, energy, and anxiety while potentially generating (through your portfolio) sizeable income large enough to comfortably cover his fees and commissions.

A dedicated broker has a deep focus on the job – his world is primarily and dominantly Wall Street. His responsibility includes researching companies, keeping himself on top of the stock market, making money for his clients – all of which may be beyond your time, skill, training or interest to do effectively.

Just remember that full-service brokers may also fall into the possibility of conflicts of interest. There may be some whose priority is to pad their pockets rather than growing your portfolio to its fullest. In such a case, they may sell your investment products with a bias towards making money for their investment firm than for you.

If you want a more hands-on approach, you can go via online trading because it can give you total control of your portfolio.

You can make trades as often as you can during trading hours unlike when you have to make your trades through your broker. You can also do your own analysis, search for different views and insights and be responsible for all your investment and trading strategies.

Many online traders equipped themselves by attending free classes, reading all the relevant books they can get their hands on at the library and spent countless hours of their time to learn how to use online trading tools for their benefit. Some of them became so successful in trading online that, within a few months into it, they quit their regular jobs to focus full time into trading. But before you get dreamy and all, just remember that there are also a number of them who lost thousands of dollars in just a few days of trading.

If you don’t find yourself in the shoes of an online trader but would prefer rather to receive personalized advice and guidance, then it would be better if you stick with a traditional brokerage.

Fees

Don’t forget that personalized advice and service always come with higher fees so, traditional brokerages often charge 1%-2% based on the assets they manage. This means that you have to pay around $1,000 to $2,000 per year for a $100,000 portfolio. Your investments should be able to earn more than that amount every year if you want to have something left over for yourself. And that’s as long as you keep the brokerage in your employ. You should carefully consider the brokerage fees in your equation especially if the purpose of your investment is for your retirement.

The good news about online investing companies is that their fees tend to be lower. You can immediately see the difference when you check the reduction in their transaction costs as compared to the fees you pay with traditional brick-and-mortar firms. Here’s the truth: web-based trading platforms charge a mere fraction of what you’ll otherwise pay to a personal broker.

Risk

A broker is someone who has the license and training to conduct stock trading in your behalf and is capable of explaining to you the pros and cons of investing in a specific stock, mutual fund, bond or other instruments. Brokers are there to help you materially lessen your risk in investing.

Online trading has revolutionized the stock market trading by making it easier for new investors to enter and opened the doors from the restrictive entry conditions of long ago.

This situation has its pros and cons. Those who enter without the necessary experience or preparation may get into serious financial trouble if they act haphazardly. The stock market, by nature, is cruelly unpredictable so anybody who ventures into it should know what he’s doing to avoid losing even the shirt off his back.

Flexibility

To talk to your traditional broker, you usually have to make an appointment, either online, through phone or in person, just so you can instruct him to trade. The time it takes to set up a meeting is, at best, an inconvenience on your part. But since time is of the essence in stock trading, the delay can cost you money or lose some important opportunities.

With online trading, the response is very fast – you can execute a trade in a blink of an eye. Many online trading websites provide stock quotes and trade information that help you see how your investments are performing in real-time. They even have accurate computations that update to how the market is presently doing. You can also receive real-time quotes, stock market news and analysis, and a lot more.

Investing Tools

Both online brokers and full-service brokers can give you access to a variety of tools for your stock market trading research.

You can find several online firms that offer professional, state-of-the-art research for free. These tools are very helpful and let you make intelligent decisions about your finances. In contrast, brokers do extensive market research for their clients so, you can save a lot of time and effort. An excellent broker assumes the role of an adviser or mentor to their customers, relying on their own trading experiences to influence the investment decisions and doing extensive, focused research into the market.

Minimum Opening Balance

Here’s the catch: full-service brokers usually pick clients who have several thousands of dollars to work with. For some, you need to have at least $5,000 for a full-service broker to accept your account.

But, when it comes to online brokers, you only need a few hundred dollars to open a new online brokerage account. Most of them require a small minimum amount to let you open a new online account. This can be as low as $500. It depends, of course, on which broker you want to open an account with.

Summary

Full-service Broker Discount/Online Brokers
Management Service of trained, skilled, and experienced brokers You are responsible for your own analysis, get insights and invest
Fees Numerous and high Few and low
Risk Brokers are professionals who help substantially control your risk Higher risk especially for novice traders
Flexibility You are dependent on your broker You depend only on your own
Investing Tools Variety of tools for research Variety of tools for research
Minimum opening balance Initial opening of several thousands of dollars, about $5K and up Low initial opening, About $500 +

How To Choose Between Them?

The choice between a full-service broker or a discount service is just the tip of the iceberg. There are still other factors to consider when picking a broker to help you in your investment journey such as customer service, charges, fees, investment options and more.

Just remember that whether you go traditional or modern online, no single broker is perfect for every investor. It all depends on your personal needs and preferences, so you carefully have to balance the costs against the benefits of each broker, and meticulously compare the level of services and features they both offer.

Consider these 3 factors:

  • Time. Think of how much time you have to manage your account. Do you have enough time for it? Do you perceive it as a hobby or as a main business?
  • Knowledge. Carefully assess your knowledge level on the matter before you start trading on your own. Can you confidently use the tools and resources to use the data and information to make smart decisions with your investment money?
  • Money. If you’re setting off with a small budget, it’s a good move to start on your own. But, if we’re talking about a humongous capital, help from professionals is almost always necessary.

For the majority of investors, the more practical choice would be a discount broker. Primarily because of the prohibitive cost of a full-service broker, an investor must be able to generate sufficient income just to afford their services. On the other hand, going with a discount broker while learning how to use them efficiently and effectively wouldn’t put too much strain on the investment capital.

So, you’ll be spending less but you’ll be educating yourself in the process. Also, you can find a reputable broker who can serve your trading requirements and also teach you at the same time. Simply open an account and choose the level of service that you want. Later on, you can change this level of service according to your level of need.

Spend regular time reviewing your investments just to make sure that you are on the right track income-wise and still within the comfortable level of risk that you’ve set. Be sure to read all the messages your full-service or discount broker sends you as some of them may contain fee information that may drastically affect your account and return on investments.